November 15, 1978
The western economy continues generally strong, though feelings are mixed as to how long this strength will continue given rising interest rates. Retail sales are brisk and retailers are generally optimistic about holiday sales. Despite this optimism, inventories are still under tight control in most areas. While there has not yet been any decline in commercial credit demand due to the rising interest rates, construction activity has begun to weaken in some areas. Basic industrial activity appears still strong, though there does seem to be an unusually large number of strikes in some areas.
In general, retail sales in the West continue strong and most observers expect continued strong sales into the holiday season. Several of our directors argued that the strength in retail sales represented consumers buying now in anticipation of more rapid inflation later. A banker-director felt that currently strong sales in California are being assisted by both rapid employment growth as well as the property tax savings resulting from Proposition 13. Contrary to the consensus, two directors involved in the food industry did not expect especially strong holiday sales.
The general feeling is that despite these optimistic sales expectations, inventories are being kept under tight control, even if this strategy entails some loss of sales. High financing costs are said to be enforcing this tendency to keep a tight rein on inventories. There is one exception to this pattern. The largest department store chain in Oregon, which expects excellent holiday sales, is currently holding inventories equal to sales. It claims that this is an aggressive inventory posture since its normal procedure is to keep inventories below sales.
There are not yet any indications that industrial and commercial demand for credit has weakened due to rising short-term interest rates. The outlook for the near future is extremely mixed with some of our directors certain that the higher rates will not cause a slowdown and others just as certain that the demand for business loans, and thus economic activity, will weaken within the next few months. Most, however, seem to feel that credit demand will weaken somewhat before the second quarter of next year.
There appears to be almost unanimous agreement that housing will suffer from the higher rates. Indeed, weakness in the construction sector has already begun to appear in some areas. The extreme cases are in states with usury ceilings. Idaho, with a 10 percent ceiling, had September housing starts 50.7 percent under a year ago. However, even Utah, which has no interest rate ceiling and has an otherwise booming economy, is starting to see some weakening in construction. In central California, it is reported that building contractors are reluctant to carry any significant inventory of finished lots and are no longer anxious to build houses on speculation.
One exception to this general weakening in construction activity comes from a builder-director in southern California. He claims that construction is still booming and there still exist shortages of labor (skilled and unskilled) and several types of materials (especially cement). He notes that the only slowdown he is aware of is in speculative industrial projects. This same director expressed serious concern about rising construction costs which were generated by two phenomena: (1) a serious decline in productivity and (2) mandated environmental controls.
The aluminum industry continues to experience very strong demand. Kaiser Aluminum plans a 20 percent expansion in capital spending over the next year, but virtually all of this will take place offshore. The market for lumber is generally characterized by strong demand, and American producers are having difficulty supplying the tremendous export demand. Producers do note two trends: (1) the demand for "dimension lumber" is beginning to flatten out which suggests a possible slackening in the housing boom, and (2) particle board demand is down drastically which indicates a slackening in the mobile home industry.
A number of strikes are currently underway on the West Coast. A strike against Safeway continues in San Francisco. Grocery clerks are also striking in parts of Oregon, as are pulp and paper workers and some railroad workers. The total number of workers currently involved in labor disputes in Oregon is the highest it has been since 1970.